Economics Update January 2025 - Trump presidency: Sober analysis, but no complacency

Ahead of Trump's inauguration as President of the USA, there is a noticeable discrepancy between the growing nervousness in the media on the one hand and the apparent calmness on the capital markets on the other. The latter are concentrating on the question of what concrete policies can actually be expected from Trump in the coming months, and the result of the analyses so far does not appear to be clearly negative. The reason for this lies in the points that had already boosted the US equity markets in the run-up to the election: both the prospect of further tax cuts and comprehensive de-regulation measures lead us to expect higher corporate profits, particularly for US companies (and especially for their domestic activities). 

Nevertheless, the capital market environment is not all positive, and this is particularly evident in the rising long-term interest rates. Behind this development is the concern of persistently high or possibly even rising inflation in the USA. Such a rise in inflation could be fuelled by several factors: firstly, there is the threat of tariffs on US imports, which could generally push up prices in the US. The prevailing expectation at present is that Trump will use tariffs primarily as a means of exerting pressure to realise his own interests. However, it should be borne in mind that the threat alone is already capable of causing a reallocation of global production resources, which in itself has a price-driving effect. Furthermore, the credibility of the threat implies that tariffs could actually be used in at least some areas, at least if one does not realistically want to assume that the Trump administration can fully assert its interests.

Secondly, the announced mass deportation of illegal migrants and a much more restrictive immigration policy in general would have noticeably negative consequences for the US labour market, resulting in rising wages and thus potentially rising prices in the service sector. Recently, cracks have been visible here between the intentions of individual politicians and the MAG-orientated base of the Republican Party, and it remains to be seen which policies will actually be implemented.

Thirdly, the expansionary fiscal policy harbours the risk of a persistently high budget deficit and a high level of debt, with the result that investors are demanding higher interest rates on US government bonds. This is probably the biggest challenge for the new US government, as there is a clear conflict of objectives between the planned deficit reduction and the other planned measures.

Further rising interest rates are the biggest threat to a continued positive stock market environment, and this will be our focus in the coming weeks and months. What is needed is a sober analysis of the new (old) president's actual actions beyond his daily statements on X as well as the avoidance of misplaced carelessness.